Overview

Transaction volumes for real estate in Japan have increased substantially compared to the market nadir in 2012. Recent figures by Real Capital Analytics (RCA) suggest that approximately JPY2.7 trillion worth of properties were transacted from reported deals in Japan during 1H/2015. Approximately 80% of the total transactions were concentrated in Tokyo, while transactions in other regions also rose as investors sought higher yields. Over the past few years, Japan’s transaction volumes in the second quarter have tended to be lower than in the first. The uncertainty of the global economy, however, geopolitics and the scarcity of opportunities in the current market significantly pulled the Q2/2015 figure down to JPY695 billion, the lowest level since late 2012.

The office market in Tokyo has been one of the most popular for many investors thanks to Japan’s positive economic outlook and its institutional grade market. Amid interest from overseas investors and strong domestic demand, acquiring assets with reasonable yields has been more challenging, and the expected cap rate1for Grade A office buildings in Tokyo has already touched the lowest level since 2007. However, considering the ultra-low-financing cost in Japan, Tokyo’s office market is appealing as it offers one of the widest yield spreads (approx. 3.1% as of Q2/2015) compared to other major cities. In addition, with the continued positive rental growth in the office sector over the past two years, Tokyo’s prime office capital value has a significant potential for further growth. The Q2/2015 capital value still stands at 40% lower than the peak in Q4/2007.

Investment volumes by asset class

In 1H/2015, the office sector remained the most popular asset class, accounting for about half of Japan’s total acquisitions by value, followed by retail at around 16% and residential at just over 9%. One of the notable transactions in 2015 year-to-date was the sale of Meguro Gajoen, a 155,800-sq m office complex in Meguro Ward, by Mori Trust. The buyer was LaSalle Investment Management who reportedly paid approximately JPY140 billion for the asset with China Investment Corporation (CIC) funding.

Major players in Japan’s property market

With strong commitment by the Abe administration and the Bank of Japan (BOJ), Japan’s economy has enjoyed reasonable gains in the financial market while export businesses have also generated profits. The TSE REIT Index grew from 957.38 (29 June 2012) to 1,803.13 as of 30 June 2015. The market capitalisation in the J-REIT sector substantially increased – to approximately JPY10.6 trillion as of June 2015 from JPY3.6 trillion as of June 2012. Hence, listed companies and REITs (Listed/REITs) accounted for more than half of all property transactions, while transaction volumes by cross-border investors also grew, with a 15% share of the total.

Japanese Real Estate Investment Trusts (J-REIT)

During 1H/2015, three new J-REITs were successfully listed on the Tokyo Stock Exchange (TSE). Kenedix Retail REIT specialising in retail facilities was listed in early February, with an initial portfolio of approximately JPY80 billion (18 properties). A month later, Healthcare & Medical Investment Corporation sponsored by Sumitomo Mitsui Banking Corporation (SMBC) and other entities was listed. The J-REIT specialises in healthcare facilities including nursing homes for the elderly, with around JPY24 billion (16 properties) of assets under management (AUM) at the time of the listing. In June, another new J-REIT Samty Residential Investment Corporation was listed on TSE with initial AUM of JPY30.5 billion (28 properties), with regional rental residences comprising 70% of its portfolio. These new players are a testament to the further diversification of J-REITs in terms of asset class and geography.

The current competitive environment has put increased pressure on some market players to diversify their portfolios while keeping an eye out for high quality assets across a variety of sectors. Nomura Real Estate Asset Management recently started an initiative to merge three J-REITs, targeting assets of JPY900 billion or more.

View the entire report here.

For more on Japan:

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Savills Japan 2015 Review and 2016 Prospects​

Foreign Investors Approach to Real Estate Investing Under $50K